If you have ever wondered what it would be like if a major oil-producing country suddenly went offline, you are getting a preview of that now. I am sometimes asked whether there are any potential scenarios in which crude oil rises to $200 a barrel (bbl) and I typically say “That could happen if war broke out in Saudi Arabia and it took that country’s oil production offline.”
Well, that also applies to Russia, which was producing more oil than Saudi Arabia when the 2021 BP Statistical Review of World Energy was released.
To be clear, Russian oil production isn’t being impacted directly by the war. Rather, the oil market is responding to the idea that Russian oil might be boycotted in places like Europe and the U.S. The idea that a substantial chunk of global oil production might go offline is what has rapidly driven oil prices above $100/bbl. In reality, China will gladly buy oil that is rejected by the West. What a boycott really means is that oil flows around the world will shift.
As I documented in Russia Is A Major Supplier Of Oil To The U.S., Russia is currently the 3rd largest supplier of crude oil and oil products (e.g., gasoline) to the U.S. For the entire year of 2021, the U.S. averaged 670,000 barrels per day (BPD) of imports from Russia (per the Energy Information Administration). That represented 7.9% of total U.S. imports for the year — a significant number given our large appetite for oil.
In response to the potential loss of this oil — as well as oil prices that are rising unabated — the Biden Administration has sent a team to Venezuela to try to improve relations there. They are discussing a trip to Saudi Arabia to try to patch up that relationship as well.
I have another idea regarding a relationship they should work on patching. It is true that the U.S. oil industry is quite conservative. It’s also true that Democratic administrations tend to be hostile toward the U.S. oil and gas industry. I don’t know which came first, the conservatism of the oil industry, or the hostility of Democrats, but that dynamic has existed for a long time.
But I can’t get over the terrible optics of having a hostile relationship with the U.S. oil industry, while reaching out to Venezuela and Saudi Arabia in the hope that they can provide us with more oil.
I think one of the first things the Biden Administration should have done is convene a high profile summit of U.S. oil producers. Invite the CEOs of ExxonMobil, Chevron, ConocoPhillips, EOG Resources — all of the major players to the White House. Ask them what needs to be done to get U.S. oil production back to pre-pandemic levels.
Although U.S. oil production has risen over the past year — and is now 2 million BPD above the pandemic lows — it is still 1 million BPD below the pre-pandemic levels. So, before making concessions to Venezuela or Saudi Arabia, isn’t it worth gaining a better understanding of what could be done in the U.S. to boost production? U.S. producers are certainly highly incentivized to produce at these levels, but the Biden Administration should take the time to listen and understand what other factors are holding them back — and address them if possible.
Meanwhile, the Biden Administration should also look into whether there are mechanisms to quickly reduce U.S. oil consumption. One example could be to incentivize more four-day workweeks. We saw oil consumption plummet in 2020 when stay-at-home orders were put in place. It is certainly reasonable to believe that wider adoption of this strategy could take a bite out of U.S. oil consumption and help close the supply/demand gap.